The following article is excerpted from a brand-new eBook on gold and silver published by Robert Prechter, founder and CEO of the technical analysis and research firm Elliott Wave International. For the rest of this fascinating 40-page eBook, download it for free here.

Have you ever traveled abroad and taken a look at the local currency and wondered how the citizens of that country could take seriously what looks like “Monopoly money?” I’ve got news for you: You’re using the same stuff. Monopoly money is the money over which some government has a monopoly. It is the currency of the realm only because the state makes it illegal to use any other type.

Promissory notes issued by a state and declared the only legal tender are always doomed to depreciate to worthlessness because of the natural incentives and forces associated with governments. A state cannot resist a method of confiscating assets, particularly one that is hidden from the view of most voters and subjects. By extension, it is unreasonable to advocate a standard for such notes, which is simply a state’s promise that its currency will always be redeemable in a specific amount of something valuable, such as gold. A gold standard of this type is only as good as the political promises behind it, reducing its value to no more than that of paper. It could be argued, in fact, that a state-sponsored gold standard is far more dangerous than none at all, as it imbues citizens with a false sense of security. Their long range plans are thus built upon an unreliable promise that the monetary measuring unit will remain stable. Later, when the government’s “IOU-something specific” becomes, as Colonel E.C. Harwood put it, “IOU nothing in particular,” reliability disappears and the arbitrary reigns. Although the populace tends to retain its confidence in the currency for awhile thereafter, the ultimate result is chaos.

The only sound monetary system is a voluntary one. The free market always chooses the best possible form, or forms, of money. To date, the market’s choice throughout the centuries, wherever a free market for money has existed, has been and remains precious metal and currency redeemable in precious metal. This preference will undoubtedly remain until a better form of money is discovered and chosen. Until then, prices for goods and services should be denominated not in state fictions such as dollars or yen or francs, but in specific weights of today’s preferred monetary metal, i.e., in grams of gold. Anyone might issue promissory notes as currency, but the acceptance of such paper certificates would then be an individual decision, and risks of loss through imprudence or dishonesty would be borne by only a few individuals by their own conscious choice after considering the risks. Critical to the understanding of the wisdom of such a system is the knowledge that private issuers of paper against gold have every long run incentive to provide a sound product, just as do producers of any product. As a result, risks would be minimal, as the market would provide its own policing. Thievery and imprudence will not disappear among men, but at least such tendencies in a free market for money would not have the potential to be institutionalized, as they are when a state controls the currency. From a macroeconomic viewpoint, occasional losses resulting from dishonesty or imprudence would be extremely limited in scope, as opposed to the nationwide disasters that state controlled paper money has facilitated throughout history, which have in turn had global repercussions. As Elliott Wave Principle put it, “That paper is no substitute for gold as a store of value is probably another of nature’s laws.”

That being said, it is also true, and crucial to wise investing, that markets come in both “bull” and “bear” types. Being a “gold bug” at the wrong time can be very costly in currency terms. For nearly three decades, gold and silver’s dollar price trends have confounded the precious metals enthusiasts, who for the entire period have argued that soaring gold and silver prices were “just around the corner” because the Fed’s policies “guarantee runaway inflation.” Yet today, 29 years after the January 1980 peaks in these metals and despite consistent inflation throughout this time, their combined dollar value (weighting each metal equally) is still 40 percent less than it was then.

It is all well and good to despise fiat money, but it is hardly useful to sit in gold and silver as if no other opportunities exist. In contrast to the one-note approach, which has had an immense opportunity cost since 1980, competent market analysis can help you make many timely and profitable financial decisions in all markets, including gold and silver.

“The free market always chooses the best possible form, or forms, of money.”

I don’t know about that…the market is guessing or trying the best; how can one prove a market choice is best? what’s best, optimal? markets are rather pragmatic.

“The only sound monetary system is a voluntary one.”

I don’t agree; a voluntary monetary system is the most “moral”, but not sure it’s a sound one (from a technical point of view). I don’t know how to put it (ie fortunately or not), our societies don’t advance on “moral” aspects all the time (moral is a temporary and relative to people customs.

I’m not sure a gold standard is very pragmatic choice today; there just isn’t enough gold in the world for 6 billion people, hence the money (gold) will be so scarce that everybody will hoard, hence a permanent deflation with very low consumption.

There is a lot of talk bout this gold standard, but I wanted to offer a different point of view

Currency is not a government promise of anything. Currency is a unit of measure of value that the government requires that we use. It’s important to have such a unit of measure so that economic value can be exchanged. Without such a standard unit, the economy couldn’t function. So all the government does is to require that whenever we make economic agreements, we express the value of those agreements in these standardized forms, i.e., that we express our economic agreements in terms of “legal tender for all debts public and private” as it says on our money. In the US that form is the dollar. Money has no other explicit or implied value.

Gold is not a good choice for these units of value because the supply grows more slowly than the need. As the economy grows we need more “money” so that we can exchange more goods and services. If we limit ourselves to paying each other in gold, then as the economy grows the cost in gold of everything would continually decrease — because there would be less and less gold to use for each exchange. Another way of putting this is that gold would rise in value because a unit of gold would buy more and more. This is so because the amount of gold available will become smaller and smaller compared to the amount of economic goods and services it is being used to value.

This is classic deflation, which kills economies. Deflation kills economies because if you own gold you will want to wait as long as possible to spend it since its value is continually increasing. So economic exchange stagnates as everyone puts off making purchase agreements. Why buy today when it will be cheaper (my gold will go farther) tomorrow?

I completely agree with you Russ from a “technical” and pragmatic point of view; though, there is a valid point which is made in that the government can’t stop printing those bills in more amounts than necessary (political issues) which has moral implications.